Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part IV (1)

A Lesson for the Ages: If You Can’t Beat Them Join Them –

Because U.S. citizens working abroad do not have the luxury of escaping U.S. self-employment taxation by forming a foreign entity and because no special exemptions exist for overseas companies, the techniques available for avoiding U.S. self-employment taxation are the same for self-employed individuals working abroad as they are for self-employed individuals working inside the United States. Self-employed individuals working abroad should turn their attention to forming a U.S. entity, such as an S corporation.

A popular technique for the small businessperson to avoid self-employment taxation is to form an S corporation in which he is the sole shareholder and employee. The shareholder-employee then draws his money out of the corporation in the most tax advantageous manner possible: as dividends, instead of wages. Thus, the shareholder-employee’s share of S corporation income consists entirely of dividends. Because dividends are not self-employment income, they are not subject to self-employment tax. Therefore, self-employment taxes are avoided.

Unfortunately, the IRS has cracked down on small business compliance with the payroll tax regime. In doing so, it has successfully recharacterized dividend payments made to S corporation shareholder-employees as wages, subject to employment taxes.

The conclusion to be drawn from the IRS’s success in dividend recharacterization cases is this: simplistic planning no longer suffices for even small businesses. With the current crisis in tax compliance and the looming insolvency of the United States Social Security system, the IRS is demonstrating that it will no longer ignore such “small fry.” Utilizing what opportunities still exist to cut down on payroll taxes may mean the difference between the survival and death of a small business. Fortunately, diverse methods still exist for a small business that may tip the balance toward survival.

In accordance with Circular 230 Disclosure

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.